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09/09/2007

How to Control China's "Export" of Air Pollution--Posner

Two weeks ago the New York Times published an article on pollution in China: "As China Roars, Pollution Reaches Deadly Extremes," Aug. 26, 2007, section 1, page 1. The point of interest is this: "Sulfur dioxide and nitrogen oxides spewed by China's coal-fired power plants fall as acid rain on Seoul, South Korea, and Tokyo. Much of the particulate pollution over Los Angeles originates in China" (p. 6). These effects are separate from China's growing contribution to global warming: it is possible that by the end of this year China will surpass the United States as the leading emitter of carbon dioxide into the atmosphere. Although China is making some efforts to curb pollution, its efforts are more likely to reduce the rate of growth of pollution than to reduce it from its current level, because of the continued rapid expansion of the Chinese economy, which includes a rapid growth in the number of vehicles using China's roads.
Global warming affects the entire earth, though unequally, but Chinese air pollution is "exported" mainly to a few nations, mainly Korea, Japan, and the western United States. Other differences between the carbon-emission and conventional air-pollution phenomena are that there is far more uncertainty about the magnitude of the threat posed by global warming, and far greater costs to arresting global warming, than in the case of China's external air pollution, and this enables one to see the problem of international control of air pollution in rather clearer terms than that of controlling carbon emissions.
It is a problem of externalities. The costs of Chinese air pollution to Koreans, Japanese, and Americans are not costs to China, and the benefits of abating this external pollution would not be benefits to China. But this description of the problem ignores the Coase theorem, one version of which is that if transaction costs are low, the market itself will internalize externalities and thus solve the externalities problem. We might think of the present legal regime as one in which China has a property right in the activities that give rise to pollution, or stated more precisely that its ownership of coal-fired power plants, gasoline-powered vehicles, and so forth carries with it a right to pollute. If so, then Korea, Japan, and the United States (assuming they are the only countries seriously affected by Chinese pollution) could persuade China to reduce its pollution by paying China an amount of money just slightly above what it would cost China to reduce its pollution "exports" to these countries to the level desired by the "victim" nations. This assumes that the cost of the negotiations, both among the victim nations and with China, would not be so great as to prevent a deal that made all the parties involved better off; but it is not clear why those costs should be particularly high. Nor is there a serious danger that China would increase its polluting activities in order to extort more money from the other nations, since pollution hurts the people of China far more than it hurts any other population (the pollution described in the Times article is grotesque in its magnitude and lethality).
The transaction would be efficient, but it would also bring about a transfer of wealth from what I am calling the victim nations to China. But this is a common kind of market event. A real estate developer who wanted to create a residential community on land adjacent to a funeral home, and feared that the funeral home's presence would depress house values by giving the occupants of the houses an unwelcome reminder of their mortality, could pay the funeral home to relocate.
And if buying off a polluter seems crass--"Greens" would denounce it for conveying the message that pollution is a legitimate byproduct of economic activity (a "commodity" for the victims of air pollution to buy from the polluter)--there are other means of inducing China to reduce air pollution. There are things that China wants from Korea, Japan, and the United States, and these countries can give China some of those things in barter for China's strengthening its enforcement of its existing pollution controls or adopting and enforcing newer, more stringent ones.
An alternative would be to negotiate an international agreement by which China and all other nations surrendered control over their pollution to an international environmental protection agency. But the transaction costs would be prohibitive, in part because of extreme uncertainty about the policies that the agency would adopt. Nations do not surrender their sovereignty lightly.

Comments

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Perhaps there is a "two birds" option on this one. Since China and others are producing many of the goods consumed in the US, unless we want "their" environmental sins on our souls, we'd impose a tariff which could be escrowed and drawn upon for environmental projects. How much? Well, roughly what the advanced or responsible, countries invest in anti-pollution measures comes to mind.

What jack has suggested maybe is one of the ways to solve the externalities of air pollution, but it also maybe causes a series of trade disputes among these countries for the reason that all of them could take actions to retaliate upon others. The negotiation is alway the best way. Besides, as in China, the local governments are somewhat kind of disregarding or supportive of emissions of pollutants for the ones make it contribute a lot to the local finance or have affiliated relations with them. The economic blockage among regions is comparatively severe in China, which makes the adoption and enforcement of more stringent pollution controls seem quite difficult. Fortunately, the China's Antitust Law, which particularizes the regulation of administrative monopoly, has been passed and will take effect in 2008-8-1. It will affect lots of fields including the area of pollution controls. As for china, the most emergent thing right now is to establish a relatively integrated law syetem to correspond with the development of market economy.

I see a problem in the coase argument here.
The cost to chinese might not be clearly revealed by the choices and bargainings made by the communist party (or less than in a "democratic" nations). In a position of bargain this could greatly overweight the power of China (due to the State over evaluation of the benefits of pollution as by products)...
This point could slightly reduce the accuracy of the coase argument in the peculiar case.
Best wishes,
Laurent

I like Posner's analysis of the external effects of Chinese air polution. In essence, the main victims of China's pollution (Japan, Korea, and the US) should get together to "bribe" China to emit less pollutants. The problem is that the larger the number of victims there are, the more likely the free-rider problem is to rear its ugly head. In short, this situation looks like a classic collective action problem to me.

The Problem
Chinese pollution has negative externalities for other countries.

The Solution
Posner argues that the parties should be able to come together to a mutually agreeable solution. The victim of the negative externality can pay the generator of the negative externality to change behavior. The moral hazard in this case is minimal. As Posner mentions, the negative effects of pollution on the Chinese would prevent the Chinese from simply increasing pollution to collect foreign payments.

Posner argues that absent high transaction costs, the two sides should be able to come together. I think Posner underestimates the political capital cost to any politician or political party that would suggest that we send monies to China to get them to reduce pollution exports. The political transaction costs would be, I think, huge.

Becker agrees that if reducing the negative externalities reduces the economic growth of the polluter, the polluter may only change behavior through threats or bribes.

Becker then looks for any internal motives a polluter may have to change. He argues, and history shows, that as a society becomes wealthier one of the things they want to buy is more clean air and water. As China increases in wealth, the population will want to take stops to reduce pollution. This internal drive for reform will lead to a reduction in negative externalities. I‚Äôm not sure that the Chinese government is as responsive to the Chinese people as this model implies. (Becker does say that outside pressure may spur action.)

I think the solution will ultimately rest with international emission trading systems. I would impose a very small international tariff (imposed and collected by an international body) based on the pollution generated in an items production (start with a carbon tax). This would create an incentive to reduce emissions. If countries are heavy polluters, they could face a higher tariff rate on exports. I would use the revenue to fund an international emission trading system to encourage countries to work together, with financial incentives, to find cost effective means to reduce pollution. I think the US should revisit Kyoto.

That what the world's international economic system needs is a worldwide environmental bureaucartic machine that has no clear line of leadership and accountability that lets China, and few other Asian countries, continue to develop their industrial muscle why the US is allowed to ship more machinery and know how to them, which allows them to continue to produce and led the world. What happened to the market solution to pollution. At this rate the US industrial areas will continue to look more like what they have become, ruins from a past great civilization. More closed factories and jobs shipped to China. What a great solution: bureaucracy!

How is creating an international emission trading system, which was part of Kyoto, the creation of a bureaucratic machine. You claim that you want a market solution but then reject an international emission trading system? Or do you simply consider some markets a bureaucratic machine?

We need to avoid the European experience, where the permits were too easily granted and thus the permits failed to hold value. So I think you need a central clearing house that has the ability to enforce contracts. Short of giving the clearinghouse it‚Äôs own army, we give it the ability to adjust tariffs in an effort to prevent individual countries from gaming the system. A reward for compliance and a punishment for violations with terms and procedures agreed upon.

If the US tries to adjust tariffs unilaterally there are two obvious dangers. First protectionist in this country would spend tremendous resources trying to raise the tariff for reason that have nothing to do with pollution. Second, other countries could retaliate and we have a destructive trade war.

If nations agree to be taxed (a tariff) based on the pollution (carbon tax for example) they create and you then allow them to trade pollution credits the world will have a cleaner environment at the most efficient cost.

Perhaps Professor Becker is correct that the best hope is that increasing wealth in China will lead to an increased demand in clean air. For too many, the knee jerk reaction against international cooperation may make meaningful improvements impossible.

Well, at least we now know what Kyoto was all about:i.e.,allowing the undeveloped nations to spew as much pollution as they want in order to catch up economically to the developed nations, whose growth must be restrained by controls and guilt to facilitate this transformation. This is also known as having all the Lilliputians gang up to tie down Gulliver while he's sleeping. Here's a statistic for you: since China produces as much or more pollution of all kinds as the United States with one-sixth the economic output and four times the population (i.e., GDP per capita of approximately 1/24 that of the US), we can assume that if they become as rich as we they will spew 24 times as much garbage as we do. Think about that.

This issue of pollution in China is covered extensively in "Globalisation and the Environment" blog. The China tab links to over 48 different posts on this very topic including a link to an Elizabeth Economy article that makes the New York Times article read like a "good news story".

Paying China "protection money" not to pollute as much as it otherwise would seems to invite future extortion, and rewards China for polluting or credibly threatening to pollute more in the future.

Instead of making monetary payments to the Chinese government, it might be better for the affected nations to sell hybrid cars and pollution-reducing coal plant equipment in China at subsidized prices.

Well, at least we now know what Kyoto was all about:i.e.,allowing the undeveloped nations to spew as much pollution as they want

............. hmmm in terms of per capita fossil fuel consumption that'd be US!

"GDP per capita of approximately 1/24 that of the US), we can assume that if they become as rich as we they will spew 24 times as much garbage as we do."

............ I assume you're exaggerating for effect? Such energy consumption and the associated spewing is not possible for China. They'll be far more likely to follow the Japanese model of being MUCH less wasteful of fossil fuels, in part because of having to buy it abroad. While the price-fixe of $75 oil and NG here is annoying and a drag on our economy, just think what paying that means to those earning $25/week. That's surely one reason for their huge hyro project. And....... I'd bet they'll fill in with lots of nukies as building them on their wage scale will be far cheaper than "bidding??" for priced fixed oil.

We may not be ready for Kyoto yet, but we should become a leader in clean energy. Perhaps it could be a good export biz for us, as wind power has for the last 30 years for Denmark. Jack

China is very inefficient; they use a tremendous amount of resources in production. They are the world's biggest consumer of coal. But China is unlikely to remain as inefficient or as polluting in the future.

For one thing, if China increased its pollution by 24 you would have a major health crisis in China. The number of people dead from the mass starvation of the Maoist agricultural reforms could be dwarfed by the number of Chinese dying from cancer, respiratory disease, etc. It would be virtually impossible to have any quality of life, as China became a huge toxic dump.

I don't think the Chinese are suicidal. I don't think they want to let their children or grandchildren to live in such conditions.

On a related topic, the Wall Street Journal compares Cap and Trade Vs Carbon taxes as alternative methods to reduce pollution levels in the United States.

I prefer carbon taxes: if you pollute more, you pay more. The article says ‚ÄúCritics observe that higher prices would have a particularly harsh impact on the poor.‚Äù I‚Äôm not sure I agree. The carbon tax would be a direct tax on polluting activities. The alternative is more of a stealth tax where the tax is collected indirectly.

For example, you can tax consumers of gasoline at the pump or you can tax the oil companies at the refining stage. The tax to consumers is direct to the consumer. If you tax the oil company, and you assume rather inelastic demand, they will pass along most of the cost of the tax to the consumers. Granted the oil companies may seek to discriminate between classes of customers but it is hard to imagine that the poor would benefit.

I see the political advantage of taxing the ‚Äúbig oil‚Äù company but I don‚Äôt see much difference in the final pump price. But lets say that this system saves 2 cents at the pump by reducing oil company profits. Consumers have slightly less incentive to reduce consumption. Producers have an incentive to produce less. Sellers of alternatives have slightly less incentive to develop alternatives. Government collects less revenue. Crunch the numbers and find out how large the dead weight loss is. If the goal is to reduce carbon emissions isn‚Äôt this a less then optimal economic outcome.

The biggest danger with cap-and-trade is how the permits are allocated. I think it leaves much room for political mischief. Local politicians locking in pollution rights for a few local firms could be trouble. If they have the clout to get the rights they probably have the clout to force the politicians to adjust allocations later. Sell the rights don‚Äôt grant them.

I would auction off pollution rights in various geographic areas with the goal of achieving maximum limits within these bubbles. I would allow the direct trade of permits within the bubble and charge a transfer tax on permits bought outside the bubble for use inside the bubble: to stop North Dakota from selling pollution permits to New York. A permit to pollute in New York should, I think, cost more then a permit in North Dakota. While the entire country may be able to tolerate an emission level of X if evenly distributed, you want to avoid heavy concentrations in a few areas.

I have mixed feelings about the safety valve proposal. If the tax is set correctly, some older firms that must occasionally exceed limits (peak period loads or something) could plan for these events. If the market for permits is rather illiquid this could help the market function. On the downside, these temporary permits could lower the value of full permits.

Dan: I agree that "cap and trade" is mostly a scam to put off doing anything effective.

The truth seems to be that through a failure of democracy we've flown ourselves up a blind canyon where the options are few. Having lived through the "70's oil crisis" I've watched with horror as "we" built our fleet of gashogs and millions of new homes designed as if fossil fuel were in limitless supply. A passing observer could easily conclude that the largest consumer/waster of energy was teed up as suckers, or were set-up by treasonous saboteurs.

I'd agree that it doesn't matter too much whether fossil fuel taxes are "at the pump" or on the energy companies. I don't agree that the demand for energy is inelastic; it simply takes some time to react as few want to take the depreciation of selling a low mileage Lincoln Navigator for the longer term savings in fuel, and, of course, the sale will not remove it from the road, though it may be purchased by lower a mileage driver.

I'd think this week's adjustments by the OPEC cartel, to try to keep oil under $80 would indicate that, they too, understand that their best customer/oil addict, can and will respond if oil prices become too onerous, and that they are still sending sons of the royal family to study econ at Harvard.

Regional pollution standards may make some sense, but in the case of CO2 it doesn't matter where it is produced.

As for taxing ourselves into better behavior, I've thought for more than 30 years that we'd be VERY wise to shift some of our tax burden from income to non-renewable energy. Naturally, there were factions (aided by oil lobbyists?) who derided "taxing oil" as violating some god-given natural order, as if the income tax came down from the Mount with Moses. I thought the Clinton "BTU" tax brilliant as we needed extra revenues anyway to cover the deficits. Had we implemented even a small, demand-dampening tax 15 years ago we'd be in far better shape as markets slowly reacted to the incentives to change.

The BTU tax seemed politically astute, as all the fossil fuel producers would have been treated alike. Then today, as the CO2 problem emerged it would be a separate debate as to whether coal etc should bear heavier taxation. That may not be as simple as it appears, as less coal is used, more of the finite supply of NG will be used, leaving us fewer options in the future.

I'm assuming that while wind will pick up more of the electrical generation, that there is no way out of the canyon but the building of lots of nuclear power plants; but that they are 20 years in the future. Fusion? It seems ALWAYS 20 years in the future! So for the meantime, there's oil, ng, coal or (dare I mention?) conserving what we have.

BTW there are policy changes that may seem utterly unrelated to energy consumption but that could save a lot of energy. A few years ago financial writer Andrew Tobias made a strong case for no-fault-pay at the pump auto insurance. He justified it primarily on savings on insurance and the courts costs of "fault finding" as well as ridding ourselves of the possibility of an uninsured motorist.

But, in terms of energy, switching insurance costs to a variable cost, rather than a fixed cost, would give further incentives to drive less. Also, if would be easier for families who require a gashog in their business or for recreation to own an extra, more efficient car for errands and commuting. Though a great win-win-win idea you can imagine the political resistance put up by thousands of insurance brokers who'd no longer be needed. Jack

I would not call cap and trade a scam. I think it is a second best solution. Senator Feinstein supports cap and trade because she says it is more likely to survive the political process.

My understanding is that many companies and unions support cap and trade. I suspect they think that, through the political process, they will have more control over setting limits. Or, giving the benefit of a doubt, they may fear that a carbon tax could be tapped as a revenue source for projects that have the slightest connection to pollution. (see homeland security spending)

Who knows what damage the Congress could do if they were suddenly given a fresh pool of money to waste on things like wind energy etc.

I would be very interested in what Professor Becker and Judge Posner think of cap and trade Vs carbon tax on the eve of Congressional debates and bills.

Is Judge Posner assuming here that the Chinese should have property rights over their own air, even if that air is pretty much certain to float over to LA?
The key first step in the Coase theorem is to establish who has the property rights; the other side then has to pay for negative externalities it doesn't like.
But why does China have property rights here given the significant and almost certain air flows to other countries? If countries accepted a supranational authority that claimed ownership of the atmosphere, polluters would not have property rights.

Yes, I suspect "cap and trade" is attractive to Feinstein in the manner of pols making a claim of "doing something" w/o rocking the boat or irking their sponsors, and to unions and industry for about the same reason.

But this????
"Who knows what damage the Congress could do if they were suddenly given a fresh pool of money to waste on things like wind energy etc."

.......... Perhaps you're a tad behind on wind energy and the role it will play in the near future? See RMI.org and perhaps AWEA.org for a speedy catch up? Whadja think about the taxpayer, "pool" of subsidies to oil cos during the most profitable of their price-fixed years? Wasteful?

Given, the sending of $80/bbl of cold cash to other nations or oil, would not the domestically produced energy be worthy of some level of start-up subsidies considering all the economic activity so spurred is beneficial to us all and the income from them will pay taxes into our Treasury for many decades instead of the treasuries of other nations?

"I would be very interested in what Professor Becker and Judge Posner think of cap and trade Vs carbon tax on the eve of Congressional debates and bills."

............ perhaps an enjoyable romp through the forest of "externalities" followed by a return to an established order "nyet?" and landing close to Feinstein? Does it seem the general level of awareness in the US is that of a "short term "crisis" to "get through" while we screw in a few compact florescencts and wait to resume producing profitable SUVs and inefficient buildings?

"If countries accepted a supranational authority that claimed ownership of the atmosphere, polluters would not have property rights."

......... Well, you see the problem from this thread. As "Kyoto" or other potential agreements are seen to favor the developing nation at the expense of the established nation or vs versa. Tough politics to get a standard in place regardless of who's ox gets gored. Even in the US where acid rain is a contentious issue, and where Arkansas pollutes their river with chicken "stuff" to the annoyance of, downriver, OK. Tariffs, at least equal to the investments we make in anti-air pollution efforts, anyone? Jack

You replied so quickly that I suspect you didn't take time to do a bit of homework at the sites I suggested. To clarify, I've not proposed wind as "THE" solution, ting but for electrical power, it IS, and will provide a lot of help.

Consider: Currently you've a choice of coal, or burning NG which we are already shipping across the oceans at high cost. Then, even when, or if, our LNG plant lobbyists get out of the way so the Alaska gasline can supply 10% of current consumption, that is still a yawning gap between the predicted demand and supply curve.

You second repetition of "giving Congress a pile of money" (which I've not advocated) has me wondering if your thoughts on addressing the world-wide shortfall of fossil fuels and the CO2 problems might derive more from ideology than the underlying fundamentals of the real world? If not, I'd, repeat my suggestion of boning up on wind power at the sites I mentioned. Jack

Judge Posner's idea is intriguing, but overlooks the fact that the ruling elite in China remains committed to Communist ideology. To assume that incentives conceived in capitalist markets will influence Chinese policymakers, in ways we are accustomed to expect outside China, is sheer wishful thinking.

One thing surprises me: if USA and China emit comparable amount of pollution, and such cloud impact Western neighbours then isn't Europe under the USA cloud?
Of course, this assumes that the nature of the pollution is the same, the winds are as strong, etc. -- but as the Atlantic Ocean is narrower then the Pacific, the impact might still be significant, no? Maybe Europe pollutes itself less, and pollution impacts are none linear; maybe Maghribis are the one that should complain. . .

I don't know, but if you have feel like having some political leverage because of that, maybe consider that such an idea can be used further West too.

Mr. Hatt: Good points and perhaps the good ol' USA might return to leading by example?

Not a bad idea for nuclear proliferation either; it's a bit awkward to blackball prospective new members to the Nukie frat from our position. Especially after whacking Iraq, in part because they had no "deterrent".